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ALTERNATIVE TRADING PLATFORMS AND THEIR EFFECT ON LIQUIDITY
The equity markets provide perhaps the best example of a highly evolved complex ecosystem, where care must be taken to preserve the benefits that have evolved from competition and innovation…
Crucially, liquidity is what helps to solve this mismatch problem. Market makers that see large volumes are best positioned to match differing size transactions. In traditional exchange trading, bids and offers are public, and this transparency helps buyers and sellers to achieve the best price.
For some market participants, however, the openness and transparency of the equity market actually mean they are unlikely to achieve the best price. The risk, particularly for large transactions such as those undertaken by pension funds or large mutual funds (where most small investors have most of their equity exposure), is that other market participants will use this transparency to undercut the intended transactions.
From a Goldman Sachs lobbying document (emphasis mine)
This is from a lobbying document Goldman has been passing around the Senate on financial regulatory reform in general.
There is a lot of crazy stuff in this document, but the most notable is probably this passage, in which Goldman pooh-poohs the notion that complete transparency in markets creates accurate prices.
Instead, the bank argues that an over-the-counter market in which big traders like Goldman get to do deals in the shadows in “dark pools” without the retail investor having any knowledge of what the hell is going on is somehow better for everybody, that this somehow produces better prices. Of course the reality is that the two-tiered system creates one pool of fools whose every movement is visible to every animal on the Serengeti, and another pool of giant bloodthirsty carnivores who get to walk around invisible, picking off the dik-diks one by one.
Everyone I showed this to had the same reaction — “I can’t believe they said this out loud.”
One friend of mine put it this way: say Goldman buys a big block of stock from a pension fund in a dark pool. Now they have shares they want to get out of and flatten out their risk. So where do they sell? Well, a big chunk of it might go to the retail schmuck who has no idea what’s going on. He’s buying 1000 shares of whatever at $28, not knowing that Goldman has another 50,000 shares to go. Next thing you know, the schmuck’s shares are at $27.
Goldman salutes this process, noting the magic of so-called “non-displayed liquidity.” What the rest of us would describe as “hiding shit from the rabble,” Goldman calls “separating liquidity from information about the transaction.” You almost have to admire the sheer balls of this sort of propaganda:
Alternative trading platforms – so-called “dark pools” of liquidity – have evolved to address this problem. They work by separating liquidity from information about the transaction – the participants, lot sizes and transaction prices. Through the process of “non-displayed liquidity”, information does become available to both regulators and the public market – but not until the transaction is complete.
God bless this company. They’re never boring, that’s for sure.
- Portions of Album Content Provided by All Music Guide © 2009 All Media Guide, LLC.
I wonder what the bill is for the whiskey, women, and drugs that it takes to come up with this shit. They just never run out ideas to screw any one dumb enough to give them money. Other Peoples Money
I don’t believe in conspiracies, at least not the huge scale ones, people are just too disorganized and life is too infinitely chaotic to make these huge high dollar, control all the countries/peoples in the world types of conspiracy theories like in that Zeitgeist POS movie. On the other hand I can’t help wondering where things like “dark pools” etc. come from.. I worked in the “corporate mentality” sphere long enough to see that when the “master speaks” the dogs they do jump, so you get a bunch of people together trying to advance their careers and impress the boss, they’ll believe, do, and promote absolutely anything regardless of moral, social or physical consequences or the possibility of any negative outcome. Maybe they wear themselves out coming up with this crap and don’t have anything left for the tasks of moral and ethical discussion.
So much comes back to the concept that unlimited capitalism is all good. Unlimited profits is the highest & main purpose of business … humanitarian issues be damned.
Capitalism is good if one is motivated back the fact that through personal effort one can improve ones overall situation by double or triple or some reasonable degree, but once you get past $300,000 per year in the US a larger issue arises, just what in the heck do you need more money for?
Would it really pull the pins out from under the US economy if the goal or ultimate reward was limited to something in that area of pay? Perhaps, but I would wish to know why.
All for now, and M.T. keep up the good work!
well the latest egregious act occurred in Chicago today when Park National and its parent banks were ’seized” and sold by the FDIC to U.S. Bank.
Park National, one of the best communty lending banks in the country, that never involved itself in risky lending was declared “undercapitalized” last November when its investments (suggested by the very same regulators) in Fannie and Freddie fell to zero (after the takeover of those by the government. Then, although their losses were only due to the GRE failure, they were denied TARP funds because they were privately held. Then, without TARP they were required to raise 750,000 to pay for the Fannie and freddie losses. Andtoday, although they had a deal that required only one more week, and despite the pleadings of congressmen and mayors, they were auctioned to U.S. Bank which was able to use its billions of TARP to stabilize and gobble up the community bank. (U.S. Bank’s losses last year were the result of its lending practices. Travesty or Tragedy or both. Let me know if you’re interested in more facts
[...] first blush, the argument against dark pools and high-frequency trading appears rather compelling. Critics claim that because both practices rely on sophisticated technology and market access (via size and [...]